Mortgage Modification Guidelines

People who had trouble paying their monthly mortgage payments are facing a brighter future. In the past if a homeowner fell behind on their mortgage payments, they were certain to face foreclosure in very short order. Mortgage lender did not have a formula or set of steps to follow when they were dealing with defaulting borrowers. Their solution was to keep the monthly payments as they were, adding the missed payment to the principal. This seems like a good solution but in reality if a homeowner couldn't pay their mortgage one month they were likely to fall behind again. Now the Obama government has established a set of loan modification guidelines that will help struggling homeowners.

The new Making Home Affordable Plan, set in place by the President, is designed to change the monthly payments of a loan so they become more affordable for everyone. These payments should be 31% or less of the borrowers gross monthly income. Now when a lender notices that a borrower is falling behind, they know what to do to help them. The U.S. treasury has outlined the steps, which are known as the Standard Waterfall. This is how it works:

1. The lender will ask for the borrower to prove his income through tax returns, pay stubs and verification letters from employers.

2. The lender then calculates the borrower's monthly payment, adding all fees, taxes and insurance. Late payment fees are not included.

3. The lender will compare the gross monthly income to the monthly mortgage payment to determine the borrowers debt-to-income (DTI) ratio. The goal is to keep it at 31% or lower.

4. If the monthly mortgage payments are higher than 31% of the income, the lender will begin lowering the interest rate by 0.125% until they reach a rate that will put the mortgage payments at the right percentage or until the interest rate is reduced to 2%. The lender will not lower the interest rate below 2%.

5. If more modifications are needed, the lender may extend the length of the loan repayment for up to 40 years.

6. If the mortgage is still above the 31% goal, the lender can forbear principal which means there will be a lump sum payment due when the loan ends.

Lenders get an incentive from the government of $1,000 for every loan modification they complete. They work through the Standard Waterfall, perform a cost analysis and then decide if the incentive payment is better for them than what would happen if they pursue foreclosure. If they decide that it is, they process the modification. After making the newly agreed upon payments for a three month trial period, the interest rate is locked in for five years.

The Standard Waterfall will help lenders process loan modifications by providing them with a clear set of guidelines to follow in order to reduce monthly mortgage payments.

For essential tips and facts about how to get approved for a Loan Modification